Measures the impact of corporate bond yields over the past twelve months

How to Use Pension Liability Index

Plan sponsors can use this index to keep an eye on the impact that interest rate changes will have on pension liabilities.

Liabilities move inversely to yield, so a decrease in interest rates means higher pension liabilities. The duration of each hypothetical plan described below measures the sensitivity to interest rates. Pension plans generally have a higher duration compared to other sources as pension promises will be paid out over 50 or more years. The drivers for determining a plan’s duration are described below.

  • Short Duration – Generally reflects a plan that is completely frozen and has few active participants remaining.
  • Medium Duration – Represents a plan that may offer continuing benefits to some or all participants but also has a similar number of active participants as retired participants.
  • Long Duration – Plans that are still open and accruing benefits for all participants and have more active participants than retirees.

These calculations for hypothetical plans are used for illustrative purposes only and do not represent application to any specific plan.

Pension Liability Index Results*

The general rule of thumb is for each 1% increase in interest rates, the liability decreases by a percentage equal to the duration (and vice versa). So, for our medium plan (orange color) with a duration of 15, a 1% decrease in the discount rate would increase the liability of the plan by 15%, as shown in the graph below.

Pension Liability Index Results - 12/31/2021

*Plan sponsors who report pension (defined benefit) liabilities under either US GAAP or IFRS standards determine the plan’s discount rate as the discounted value of the expected cash flows using corporate bond yields.

The Pension Liability Index is provided for informational purposes only.  USI does not make any warranties as to the accuracy or adequacy of the Pension Liability Index or its fitness for a particular purpose.

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